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Junk Supermarket Bond’s 40% Rally Fading as Chile Sputters

By Steve Wynne-Jones
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Junk Supermarket Bond’s 40% Rally Fading as Chile Sputters

In the past year, no company in Latin America has delivered bigger returns to bond investors than Chilean supermarket operator SMU SA.

Its $300 million of notes due in 2020 have soared 42 per cent as the long-distressed company controlled by billionaire Alvaro Saieh shut stores and sold assets to restore investor confidence.

But with a plunge in copper prices depressing Chile’s economy, SMU will have a tough time generating enough improvement to spur further gains, according to Seaport Global Holdings LLC. Since reaching a two-year high of 83.9 cents on the dollar in July, the notes have been largely unchanged.

“SMU’s management has made a commendable effort,” said Michael Roche, an analyst at Seaport Global Holdings LLC. “But your efforts can only take you so far. If you don’t have a strong underlying business environment, it ultimately will limit the improvement in valuation. We may be seeing that with the bonds stuck in the mid-80s for a while now.”

In April, the Santiago-based company said it posted the biggest jump in quarterly profit before some items since 2012 as same-store sales soared by a record.

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SMU will find it difficult to make the bond payment if it’s unable to pull off a planned initial public offering, said Felipe Lubiano, an analyst at Credicorp Capital.

Newspaper Diario Financiero reported 13 August that SMU hired Banco BTG Pactual SA to manage an IPO by the end of this year or in early 2016, citing people close to the company it didn’t identify. Still, that will likely be a tough sell. There hasn’t been an IPO in Chile since March 2013.

“The main risk for the company is that, despite the improvements from an operational point of view, we still have fears on how they plan to face their upcoming local bond maturities,” Lubiano said by telephone from Santiago.

Bloomberg News, edited by ESM

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